Dave Sather's Money Matters: Playing the odds

By Dave Sather
April 1, 2014 at 5 p.m.Updated March 31, 2014 at 11:01 p.m.

As I walked through the door at Starbucks, I noticed a friend, Jimbo, sitting in the corner madly typing on his computer.

Our firm manages the retirement plan for Jimbo's employer. Earlier in the week, I had met with the oil-field services company encouraging the employees to participate in the plan. During the meeting, Jimbo complained about never having enough money.

I was hoping his keystrokes were finally getting him signed up.

Jimbo is a likable guy but a gambler and a dreamer. Everything in his world is big. His jacked-up truck is full of worthless lottery tickets, and it seems like every other month he is headed off to Las Vegas. He loves to brag about the "killing" he made in Vegas, but forgets to tell his buddies about the other 10 times that he lost big.

Today, his dream was the March Madness basketball tournament. He exclaimed, "I'm going to win a billion dollars with my bracket."

Earlier in the week, my students had studied the statistical odds of winning the billion-dollar prize offered for accurately predicting the winner of every game. I asked Jimbo if he knew the odds.

He admitted he did not but wanted to know since he was convinced he would win. There was a quarter sitting in front of him on the table. I asked him how many times he could flip it and have it come up "heads" each time. Jimbo guessed he could probably do it five, maybe 10 times.

Ten times in a row would be pretty good. I explained that in order to correctly guess all winners in the March Madness tournament it would be the equivalent of flipping a coin and it coming up heads 63 times in row. DePaul University math professor Jeffrey Bergen said those odds are 1 in 9.2 quintillion - that's a nine with 18 zeros after it.

Jimbo stared ahead and contemplated the challenge. Then, in typical Jimbo fashion, he smiled big and said he had been studying the teams.

I admitted that knowing something about the pairings would help narrow the odds. Again, referring back to Professor Bergen's research, even with the benefit of studying the teams and the pairings, that the odds of correctly filling out all brackets would be about 1 in 128 billion.

Seeing that the billion-dollar bracket was an immense long shot, I returned back to the retirement plan discussion and asked Jimbo if he had signed up. He said, "No, I don't like the odds of the stock market each day."

I agreed and admitted that the broad stock market only has about a 58 percent chance of going up on any given day, which means it also has a 42 percent chance of going down. I reminded Jimbo that even those less than favorable odds are still better than the ones he gets each time he goes to Vegas.

Jimbo rolled his eyes and said he'd rather play the Texas Mega Millions.

I asked him how that was working out. There was silence. This was not too surprising because the odds of winning the Mega Millions are 1 in 258 million.

Finally, Jimbo said, "Fine, what would you do?"

First, Jimbo's 401(k) plan matches dollar for dollar up to 6 percent of pay. However, if he doesn't participate, he won't get the match. Even if you don't like the short-term volatility of the market, it would have to drop by more than 50 percent before you would be losing any of the money he personally put in.

Secondly, focus on the long-term results of the stock market - not the day to day. Over long periods of time, meaning 10 or more years, you should average 7 percent or 8 percent per year on your money. That's far better than gambling.

Finally, remember that when you put money into a qualified retirement plan, you receive an income tax deduction, and the entire time your funds are in the plan, they grow with the taxes deferred. This helps to make a good situation that much better.

I am not convinced I've broken Jimbo of his Vegas trips, but he finally signed up for the company retirement plan. It's a start.

Dave Sather is a Victoria certified financial planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.